Sub-agent rights: A recent case on termination and indemnity payments

Sub-agent rights and termination – what practical advice arises?

This case is of interest because it has the potential to broaden the scope of sub-agent rights on termination. While the case was decided in the EU, the findings should be of interest to any business that operates as a principal or agent, or indeed sub-agent.

The Commercial Agents Regulations [2] (the Regulations) govern the relations between commercial agents and their principals and specify that an agent is entitled to payment of compensation or an indemnity on termination of the agency contract.

The court in NY v Herios found that an indemnity paid on termination to a main agent by its principal was a “substantial benefit” derived from the sub-agent’s efforts and that, in principle, the sub-agent was entitled to a share of that indemnity from the main agent (i.e. its own principal) on termination of their agreement. If an indemnity is a benefit to an agent, then the same should arguably apply to compensation payments under the Regulations which would mean that the scope of sub-agent rights on termination is broadened.

For principals, agents may be more willing to litigate over the entitlement to payment of compensation or an indemnity on termination, knowing that there is potential that the payment will need to be split with a sub-agent.

For agents, sub-agents may seek an indemnity payment from you under the Regulations.

For sub-agents, if the agent obtains an indemnity you may be entitled to a further payment.

Strategy and careful consideration will be necessary in each case. If you need advice on whether the Regulations apply to you, or want to find out more about sub-agent rights or the options available to your business on termination of an agency contract, please contact Gwendoline or Jack, who will be happy to assist.

What happened in this case?

Herios SARL (Herios), engaged as agent under an existing principal-to-agent relationship with Poensgen to sell Poensgen’s products, engaged NY as sub-agent to assist. When the agency contract between Herios and Poensgen terminated, Herios received from Poensgen payment of a goodwill indemnity.

After the principal-to-agent relationship between Herios and NY was subsequently terminated, NY pursued Herios, claiming that the indemnity paid by Poensgen to Herios was a “substantial benefit” that derived from NY’s efforts and therefore an indemnity was owed to NY.

Notably, following termination of the Poensgen and Herios agency contract, NY immediately started working as a direct agent for Poensgen.

The legal test

The test to identify if an indemnity is payable to a commercial agent on termination of a commercial agency contract is found in Regulation 17(3). If the Regulations apply, then on termination of a commercial agency contract the principal may either need to pay compensation or an indemnity to the agent. To be entitled to an indemnity, this must be stated in the commercial agency contract.

In NY v Herios, the ECJ applied the test set out in the Regulations [3] which specifies two criteria for a commercial agent’s entitlement to an indemnity payment:

• The agent has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers; and
• The payment of the indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers.

In relation to sub-agent rights, the question in this case was whether the goodwill indemnity paid to Herios by Poensgen was a substantial benefit to Herios, derived from NY’s efforts as sub-agent, entitling NY to a share in turn.

Sub-agent rights and termination – what did the court decide?

The ECJ held that the goodwill payment to Herios was a substantial benefit. However, the court decided that the application of part two of the test meant that this payment may not be regarded as equitable, where the sub-agent (NY) continues its commercial agency in relation to the same clients and for the same products, directly as agent with the main principal (Poensgen) under a separate agency contract.

The ECJ deferred to the national courts to assess if there was any loss suffered by NY as a result of termination of its contract with Herios, given that NY may continue to earn commission directly on the customers it had previously secured. That issue has not yet been decided.

Need advice or assistance?

Please get in touch with Gwendoline or Jack if you need advice on whether the Regulations apply to you, or want to find out more about sub-agent rights or the options available to your business on termination of an agency contract.

[1] NY v Herios (Case C-593/21) EU:C:2022:784

[2] The Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053)

[3] Via the original EU Directive, the Commercial Agents Directive (86/653/EEC)